Hold Congress Accountable

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Lesson

The Structure of the Federal Reserve

Peter Schiff sheds light on monetary policy, an important area of economics that few Americans actually know anything about. This lesson offers a crash course in how the Federal Reserve Bank operates, how it came to be in the first place, and how it has become more powerful and more dangerous over the hundred years of its existence.

Peter Schiff is an American economist, author, and financial commentator. A licensed stock broker, Schiff is also the president of Euro Pacific Capital, headquartered in Westport, Connecticut. He appears frequently as guest on CNBC, Fox News, and Bloomberg Television, and also hosts the popular radio show and podcast, The Peter Schiff Show. His most recent book is The Real Crash.

An issue that has a tendency to come into the public consciousness from time to time is bringing back Glass-Steagall. Initially repealed in 1999 by the Financial Services Modernization Act, primarily known as the Gramm–Leach–Bliley Act, the law that separated commercial and investment banking has received renewed support with both party platforms during last year’s presidential election calling for it to be reinstated.

The Congressional Budget Office (CBO) released a report last month projecting an increase in the federal budget deficit relative to the gross domestic product (GDP) for the first time since 2009. The deficit for this year is now expected to be $590 billion. As a percentage of GDP, that is 3.2% compared to last year’s 2.5%. It is not good news when the deficit is growing faster than the economy, which is currently growing at 1.4%.

The hardest part of drafting any new regulation is establishing a definition. In fact, most of the policy work is in the definition and there are alarmingly few policy considerations after something is defined as a covered entity. The definition of cryptocurrency has already proved problematic for regulators. Essentially, to commodities regulators, virtual currency is a commodity. For bank regulators, it is a bank. For securities regulators, it is a security. For those who regulate money transmitters, it is a money transmitter. For the purpose of property taxes, it is a property. Everyone wants a stake in the new world of virtual currency.

In 2010, Congress passed, and President Obama signed into law, a massive 2,300-page banking regulatory bill called the Dodd-Frank Wall Street Reform and Consumer Protection Act. The premise of Dodd-Frank was to prevent another financial crisis and, as the title suggests, reform regulation of Wall Street. Like many well-intentioned laws, however, Dodd-Frank in the hands of the regulatory state has turned into a crushing burden, highlighted today in a House Small Business Committee hearing titled “Bearing the Burden: Overregulation Impact on Small Banks and Rural Communities.” Rather than ending the situation where a few massive banking institutions were “too big to fail,” Dodd-Frank has actually entrenched the big banks at the top of the heap while crushing small community banks and credit unions.

Minnesota experienced a win for liberty recently when the state reformed regulations on in-home food businesses. According to the Institute for Justice, almost every state has regulations, called cottage food laws, that limit the sale of food out of the home. However, until last month Minnesota was one of the strictest states, allowing many bakers to sell their products only at farmers’ markets and events, and capping the amount they could earn annually to $5,000.

Recently, the Congressional Budget Office released their Long-Term Budget Outlook for 2015. The official CBO Outlook included some pretty scary figures. The forecast projects the deficit as a percentage of GDP to increase from below 3 percent, to nearly 6 percent in the next twenty-five years. Over the same time frame, the CBO forecasts national debt to increase to over 100 percent of GDP.

In the last decade we have had a housing crisis, a banking crisis and a car manufacturing crisis. If student loan debt does not catch up with us first, the next economic crisis is likely to be state and municipality pension debt.

This week, the Congressional Budget Office came out with its Long-Term Budget Outlook for 2015. The report foreshadows growing deficits, mounting debt, and economic harm if the status quo is allowed to continue.